Origination and Evolution of
Ownership and Control
Julian Franks, Colin Mayer and
Stefano Rossi
9 January 2003
Corporate Ownership Today
• In Europe, more than 50% of companies have
single block of voting shareholders. Mostly
families. Many pyramids (Becht and Mayer 2001,
Franks and Mayer 2001)
• In UK and US, less than 3% have single majorityvoting block. No families and no pyramids.
• Was it always like this?
Foss v Harbottle (1843)
“First, the proper plaintiff in an action in respect of a
wrong alleged done to a company… is prima facie the
company itself. Secondly, where the alleged wrong is a
transaction which might be made binding on the
company…. on all its members by a simple majority of
the members, no individual member of the company is
allowed to maintain an action in respect of that matter
for the simple reason that if a mere majority of the
members of the company… is in favour of what has
been done then cadit quaestio – the matter admits of no
further argument”
Absence of Investor Protection
"The emancipation of minority shareholders
is a recent event. For most of the first
century of company law they were virtually
defenceless, kept in cowed submission by a
fire-breathing and possibly multiple-headed
dragon called Foss vs. Harbottle. Only in
exceptional cases could they claim
protection of the court.”
L.H.H. Hoffmann, foreword to Robin Hollington’s Minority Shareholders' Rights
The Beginning of the
th
20
Century
• Minority investor protection was
exceptionally weak after Foss v Harbottle
• At the beginning of the century UK markets
were largely unregulated
• The law and finance literature would
therefore predict small capital markets and
concentrated ownership
Is this the case?
Stock Market Development
• Consistently among the largest stock markets in
the world (Rajan and Zingales 2002)
• Listed companies (industrial, commercial and
financial): 200 in 1853, “many thousands” in
1914, 4,409 in 1963, 1,904 in 2000 (Michie
1999)
• Provincial stock markets collectively as large as
the London stock exchange
Provincial Exchanges
• “The number of commercial and industrial companies
quoted in the Manchester list increased from seventy in
1885 to nearly 220 in 1906. Most of these were small
companies with capitals ranging from £50,000 to
£200,000” (Thomas)
• “By the mid 1880s Sheffield, along with Oldham, was
one of the two most important centres of joint stock in
the country, with 44 companies, with a paid up capital
of £ 12 million” (Thomas)
Merger Waves
The Companies
• All companies incorporated or reincorporated
over the period 1897 to 1903 and 1958 to
1962 that are still in existence today (40
companies)
• All companies that died and for which data
have been retained by companies house (10
companies)
The Data
• Individual firm data on insider/outsider ownership
• Names of shareholders and their holdings (outside >
1%) from share registers
• Equity issuance - rights issues, private placements
• Acquisitions - dates and shares issued
• Boards - names of directors and their shareholdings
Analysis
• Evolution over 100 years at 10 year intervals
• Compute insider/outsider, family ownership
• Contribution to growth and ownership changes
of rights issues, placings, IPOs and acquisitions
• Board representation, chairmanship of families
• Compute measures of dispersion, mutation and
separation of family ownership/control
Measures of Dispersion and Mutation
• Dispersion t to t+T = {Y(t+T)/Y(t)}1/T – 1 where Y
is the minimum number of shareholders required to
pass control threshold (eg 25%) of voting rights –
coalition control group
• Mutation t to t+T = 1 – {Z(t+T)/Z(t)}1/T where
Z(t+T) is the number of members of the coalition
control group in year t+T who were present in year t.
It measures stability of the coalition control group
Average Annual Growth in Equity
1900 Sample, 1900-2000
• Number of Observations: 25
• Mean Annual Growth: 6.6%
• Contributions to Growth:
– IPOs 1.9%
– Acquisitions 67.3%
– Rights issues 25.6%
– Placings 5.3%
Dispersion of Ownership
1900 sample
All shareholders
Directors
Outsiders
n. obs
1900-1910
7.86
21.30
6.57
25
1910-1920
2.28
9.99
12.32
25
1920-1930
4.79
16.77
11.95
25
1930-1940
1.81
20.03
-2.91
25
1940-1950
2.59
0.66
10.01
24
1950-1960
1.86
4.47
1.85
24
1960-1970
0.42
-7.47
10.04
23
1970-1980
0.07
8.81
-0.02
22
1980-1990
-5.65
13.82
-7.82
22
1990-2000
0.24
5.00
-0.14
20
mean
1.77
9.58
4.42
Mutation of Ownership
1900 Sample
All shareholders
Directors
Outsiders
n. obs
1900-1910
4.89
0.54
19.04
25
1910-1920
10.60
9.95
24.73
25
1920-1930
19.71
14.46
25.03
25
1930-1940
18.45
21.01
25.01
25
1940-1950
30.25
32.36
26.10
24
1950-1960
24.59
8.12
25.29
23
1960-1970
21.86
23.17
40.62
22
1970-1980
33.97
26.56
25.42
21
1980-1990
55.03
26.84
64.80
21
1990-2000
42.03
30.74
42.09
20
mean
25.21
18.87
31.10
Decline in Directors’ Ownership
mean
median
1900
91.61
100
1910
57.97
57.50
1920
53.58
38.51
1930
40.86
24.24
1940
35.70
17.91
1950
28.65
11.99
1960
23.75
9.22
1970
17.80
9.43
1980
14.10
0
1990
8.30
0
2000
9.85
0
Sources of Decline in
Directors’ Shareholdings
1900-1950
1950-2000
Decline
12.6
3.8
IPO
0
11.7
Acquisitions Rights Issues Placings
36.2
4.6
20.8
14
11.7
-2.3
Total
61.6
35.1
Residual
38.4
64.9
Example - GKN
• Guest Keen and Company founded in 1900
to take over two iron and steel companies
• Acquired Nettlefold in 1902 by issuing
315,000 ordinary shares to form GKN
• In 1920 quoted on Birmingham, Bristol,
Cardiff, Edinburgh, Glasgow, Liverpool,
Manchester and Sheffield exchanges
Growth Through Acquisition
• Acquired:
– John Lysaght in 1920 by issuing 2,000,000
ordinary shares,
– D Davis and Sons in 1923 by issuing 1 GKN
shares for each 5 shares in Davis and Sons, and
– Consolidated Cambrian in 1923 by issuing 2
GKN shares for every 5 shares in Consolidated
Cambrian
• Between 1920 and 1924 number of
shareholders increased from 1,000 to 20,000
Founding Family Ownership
M ean
M edian
n. obs
1900
53.92
34.78
24
1910
48.82
31.86
24
1920
44.62
29.01
24
1930
28.85
5.82
24
1940
25.57
4.25
25
1950
19.79
0.02
23
1960
14.87
0
23
1970
8.28
0
22
1980
2.08
0
21
1990
0.61
0
20
2000
0.80
0
20
M ean
22.56
Board composition:
Influence of Founding Family
B o a r d s iz e
190
0
191
0
192
0
193
0
194
0
195
0
196
0
197
0
198
0
199
0
200
0
M ea
n
F a m ily C E O
M ean
M e d ia n
5 .9 2
5 .0 0
6 .7 4
B o a r d m e m b e r s o u t s id e fo u n d in g
fa m il y ( % )
n. obs
M ean
M e d ia n
20
4 8 .6 3
4 1 .4 5
25
5 .0 0
20
4 5 .9 2
5 2 .7 5
25
7 .0 0
5 .0 0
16
6 0 .1 3
6 6 .6 0
25
7 .4 0
6 .0 0
14
6 3 .0 3
7 2 .3 5
25
7 .1 6
6 .0 0
14
6 1 .6 3
7 1 .5 5
25
7 .6 3
6 .5 0
12
6 8 .4 0
8 7 .5 0
24
8 .0 4
7 .0 0
7
7 2 .6 9
100
23
9 .0 0
8 .0 0
4
7 9 .1 2
100
22
8 .2 4
7 .0 0
4
8 6 .7 8
100
21
8 .2 4
8 .0 0
2
9 0 .6 8
100
20
7 .9 0
7 .0 0
2
9 2 .5 1
100
20
1 0 .9 2
6 9 .9 6
7 .5 3
Separation of Ownership and Control:
Percentage of Family Board Representation – Ownership
M ean
M ed ian
n. o b s
1900
-4 .5 8
0
24
1910
3 .5 3
0
24
1920
-7 .2 5
0
24
1930
6 .3 3
0
24
1940
1 2 .7 9
8 .2 1
25
1950
1 0 .4 1
7 .4 0
23
1960
1 2 .4 5
0
23
1970
1 2 .6 0
0
22
1980
1 1 .1 3
0
21
1990
8 .7 1
0
20
2000
6 .6 9
0
20
M ean
6 .6 2
Conclusion from 1900 Sample
• UK at the beginning of the century looked
like UK not Germany today
• Chandlerian view that family control
persisted is correct
• But rapid dispersal of ownership
• Main driver for dispersal was growth
through acquisition
• Occurred in the absence of formal investor
protection
Introduction of Investor
Protection
• 1947: LSE eliminated differences between
formal and informal listing requirements
• 1948: Companies Act:
– Minimum of 5 years of earnings history
– Anti-director rules
• 1960’s: takeover panel rules
• 1980: minority investor protection in statute
The Rise of Investor Protection
“A statutory remedy was provided for the first
time in 1948 but this proved relatively
ineffectual. It was not until 1980 that Parliament
forged the sword which is now section 459 of
the Companies Act 1985 and which enables the
unfairly treated minority shareholder to slay the
dragon."
L.H.H. Hoffmann, foreword to Robin Hollington’s Minority Shareholders' Rights
Founding Family Ownership
Mean
Median
n. obs
1960
52.17
51.25
25
1970
27.83
19.45
25
1980
16.69
4.75
22
1990
6.32
0
22
2000
4.44
0
20
Mean
21.49
The 1960 Sample
Dispersion of Ownership
• Mean: 3.80% (All shareholders)
• 1900 minus 1960 – t-tests of differences in means
First decade
Second decade
Third decade
Fourth decade
Overall
All shareholders
–0.82
2.06b
–0.40
–1.60
0.21
Directors
–1.89c
–0.71
–1.15
0.14
–1.19
Outsiders
–4.94a
–0.34
0.20
–0.78
–2.87a
Mutation of Ownership
• Mean: 40.01% (All shareholders)
• 1900 minus 1960 – t-tests of differences in means
First decade
Second decade
Third decade
Fourth decade
Overall
All shareholders
–1.08
–2.23b
–3.09a
–2.72a
–4.40a
Directors
–2.25b
–2.30b
–3.54a
–1.71c
–4.41a
Outsiders
–3.38a
–2.60b
–3.14a
–2.45b
–6.05a
Directors (board)
–2.47b
–1.92c
–1.96c
–0.83
–3.59a
Board composition:
Influence of Founding Family
Board Size
Family CEO
Mean
Median
1960
3.16
3.00
1970
5.72
1980
Board members outside founding family (%)
n. obs
Mean
Median
21
46.69
41.65
25
5.00
15
67.94
77.50
25
6.64
6.00
9
77.12
86.65
23
1990
7.09
7.00
4
84.14
100
22
2000
7.00
6.00
3
83.62
100
20
Mean
5.83
10.90
71.90
Separation of Ownership and Control:
Percentage of Family Board Representation –
Ownership
Mean
Median
n. obs
1960
1.15
0
25
1970
4.23
0
25
1980
6.09
0
22
1990
9.55
0
22
2000
11.94
0
20
Mean
6.59
Conclusions from Comparison
• Pronounced change in investor protection in
second half of century
• Associated with similar rate of dispersion of
ownership and control but faster mutation
• Family board control retained even in the
presence of dispersed ownership
• How did dispersion occur in absence of
investor protection?
Prospectuses and Listing Rules
• Early 20th century, shares often sold without
prospectuses, e.g. 1911-1913, 596 public
companies formed without prospectus and
378 with
• Many shares were traded without listing
requirements – 5,000 officially quoted, 400
actively traded, many more traded but not
quoted
Monitoring by Trust
• Ownership was dispersed, but geographically
concentrated
• Provincial stock markets accessed local investors:
Lavington (1921): “Local knowledge on the part
of the investor… of the vendor… and his
undertaking would ensure fair prices…. The
securities are rarely sold by means of a
prospectus… they are placed among local people.”
Growth and Mistrust
• Stock acquisitions led to geographical
dispersion
• Local implicit contracts were weakened
• 1920’s and 1930’s several scandals and
failures (e.G. Hatry, Royal Mail Steam) led
to pressure for regulatory change
• Investor protection resulted
Regulation, Private Benefits and Trust
Regulation Hypothesis
• Stock market regulation increases the incentives to go
public and disperse ownership
Private Benefits Hypothesis
• Large family board representation reduces rates of
dispersion of ownership
Acquisition Hypothesis
• Takeovers and equity issued outside the city associated
with greater dispersion of outside ownership
Determinants of Dispersion of
Ownership
1900 Sample
(1)
0.004
(.019)
(2)
0.040
(.026)
Directors’ ownership
Family representation
on boards
No. of acquisitions
(3)
0.003
(.019)
0.104a
(.035)
–0.084a
(.031)
(4)
0.049c
(.027)
0.051
(.032)
–0.077a
(.029)
–0.004c
(.002)
0.015
(.016)
NO
0.103
183
–0.005c
(.002)
–0.014
(.019)
YES
0.117
183
Geo
Company Ownership
(i.e. no. people>25%)
Constant
Decade fixed effects?
R2
N obs
0.038b
(.015)
NO
0.001
188
–0.022
(.021)
YES
0.131
188
(5)
0.018
(.017)
0.081a
(.029)
–0.087a
(.029)
0.029b
(.012)
–0.008
(.007)
–0.009b
(.004)
0.013
(.017)
NO
0.190
181
(6)
–0.020
(.043)
0.045
(.031)
–0.082a
(.027)
0.030b
(.013)
0.021b
(.009)
–0.009a
(.003)
0.079b
(.040)
YES
0.262
181
Determinants of Mutation of
Ownership
1900 Sample
(1)
–0.256a
(.059)
(2)
–0.392a
(.125)
Directors’ ownership
Family representation
on boards
No. of acquisitions
(3)
–0.220a
(.058)
–0.233b
(.099)
–0.038
(.113)
(4)
–0.017
(.117)
–0.065
(.126)
–0.055
(.115)
0.014b
(.006)
0.519a
(.070)
NO
0.174
184
0.017a
(.006)
0.224c
(.123)
YES
0.213
184
Geo
Company Ownership
(i.e. no. people>25%)
Constant
Decade fixed effects?
R2
N obs
0.400a
(.050)
NO
0.094
190
0.577a
(.102)
YES
0.189
190
(5)
–0.203a
(.059)
–0.253b
(.099)
–0.023
(.114)
0.007
(.016)
–0.056
(.048)
0.013c
(.007)
0.506a
(.071)
NO
0.175
182
(6)
–0.318b
(.134)
–0.095
(.125)
–0.043
(.115)
0.022
(.016)
–0.064
(.069)
0.014b
(.006)
0.537a
(.108)
YES
0.212
182
Conclusions:1
No support for investor protection thesis:
• Dispersed ownership, large capital markets and
merger waves in absence of investor protection
• Evolution of ownership and control did not alter
with substantial changes in regulation in middle
of the century
Conclusions: 2
• Trust and local implicit contracts played an
important role in facilitating ownership
dispersion
• Takeovers primary cause of dispersal of
ownernship
• But geographical dispersion undermined
relations based on trust
• Formal investor protection was the response
Conclusions: 3
• Increased investor protection associated
with greater liquidity
• Slower evolution of corporate control
• Family retention of board control
• Corporation as legal entity provides basis
for distinct evolutionary processes
Conclusions: 4
• Striking contrast between UK and German
evolution
• In UK, families relinquish ownership but
retain board control
• In Germany, families retain large share
blocks but accept separation between
supervisory and managerial board control